Employee Provident Fund rate cut from 8.65% to 8.55%

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The Employees’ Provident Fund Organization has reduced the annual interest rate on the Employee Provident Fund (EPF) by 0.1%. The cut may have been larger had the EPFO not sold some ETF units.

In a sign of struggle against falling interest rates, the EPFO has cut the interest rate on EPF accounts from 8.65% in 2016-17 to 8.55% in 2018. The EPFO also reportedly sold investments in equity worth Rs 2,886 crore to be able to pay this rate. The EPF started investing in equities in 2015. Here is how EPF rates have moved over the past 5 years:

FY

EPF Rate (%)

2013-14

8.75

2014-15

8.75

2015-16

8.80

2016-17

8.65

2017-18

8.55

Nonetheless, the EPF rate remains nearly a full percentage point over the PPF rate (7.6%). The PPF or Public Provident Fund which is available to self-employed individuals as well as employees. This has led to protests from some commentators about unequal treatment to self-employed persons.

There are over 6 crore employees who are subscribers of EPF.

“It is difficult to evaluate about future in view of present economic scenario. We paid 8.65% last fiscal, which left a surplus of Rs 695 crore. This year, we have decided to recommend 8.55% for 2017-18, which will leave a surplus of Rs 586 crore,” Labour Minister Santosh Gangwar has been quoted as saying by PTI. He was talking to reporters after the EPFO trustees meet.

The board decision has to be approved by the finance ministry, and thereafter the rate of interest is credited to subscribers’ account.

Equity Investment

The EPFO invests 15% of its incremental corpus (new inflows) in equities through exchange-traded funds or ETFs. These funds passively replicate the stock market index and are hence low cost. The EPFO plans to hike this to 25% and directly credit these units to subscriber accounts, paying returns only on the balance corpus.

This is aimed at making the EPF a bit more competitive against its chief rival, the NPS, where subscribers can invest up to 75% in equities. The sector regulator for the NPS recently floated a paper to hike the equity limit to 75% in both major categories of NPS plans.

Budget 2018

The 2018 budget introduced two additional benefits to the EPF

The government will contribute the Employer share of EPF contributions for new employees for the next three years.

Women employees will have their mandatory contributions reduced from 12% to 8% for the first three years of their joining.